Understanding Bond Pricing
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By better understanding bonds, you can more confidently use them to strengthen your portfolio.
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Resources to help inform and assist you in managing your assets
Education on securities
Insights for helping you make more prudent and informed decisions
Develop an Ongoing Strategy with Fidelity
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CommonQuestions
How many of you currently have bonds in your portfolio?
1Ever wonder why it’s harder to get a bond quote than a stock quote?
2How many of you have a grasp on what you’re being charged per bond trade?
3
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Today’s Agenda
Assessing Pricing for Individual Bonds
Comprehending the Bond Market
Understanding Trading Costs
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Understanding the Bond Market
Volume
Makeup
Size
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The Makeup of the Bond Market Varies from the Stock Market
STOCK MARKET BOND MARKET
Makeup Equity shares of publicly owned companies
Debt securities issued by corporations,governments, government
agencies, municipalities
Size Limited to size of shares offered by companies
Relatively small and large debt instruments
Trading marketplace
Centralized (Ex. NYSE or NASDAQ)
Fragmented, bonds are traded
“over the counter.”
Pricing transparency
Generally transparent and liquid Larger issuance = more transparent/liquidSmaller issuance = opaque pricing/less liquid
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Size
1.Bonds—SIFMA,, Q3 2018, Equity-World Federation of Exchanges 2. Bonds—SIFMA, Q4 2018, Equity AMEX/ARCA, NYSE, NASDAQ, BATS, DirectEdge. 3. Bonds-FINRA Jan 2019, Equity-World Federation of Exchanges Dec 2018 4. FINRA—Recent 10-K filing.
In general, the bond market is volatile, bond prices rise when interest rates fall and vice versa. This effect is usually pronounced for long-term securities.
Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.
CHARACTERISTICS BOND STOCK
Market Size1 $42 Trillion $36 Trillion
Daily Trading Volumes2 $852 Billion $409 Billion
Number of Securities3 1,150,000 5,334
Ford (example)Outstanding4 $79 Billion $34 Billion
Ford (example)Number of Issues4 311 1
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Volume: US Bond Markets
Source: FINRA, SIFMA, Dec 2018
DAILY TRADING VOLUME ($BN) AND CUSIPS OUTSTANDING
$589
$218
$30 $12 $4 1K 43K109K
989K
14K 0K
200K
400K
600K
800K
1.0M
1.2M
$0
$200
$400
$600
$800
$1,000
Treasuries MBS Corporate Municipal Agency
Daily Trading Volume ($BN) # of Cusips
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The bond market can be difficult to navigate because of its fragmented nature, its size, and its inconsistent trading.
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Assessing Pricing for Individual Bonds
Live Pricing
Valuation Pricing
Historical Pricing
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Valuation Pricing: Monthly Statement Bond Pricing Valuation
For illustrative purposes only Source: Fidelity.com Screen-print taken on 1/30/2019
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Valuation Pricing: Nightly Valuation
For illustrative purposes only Source: Fidelity.com Screen-print taken on 12/22/2016
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Valuation Pricing: Bond Details
For illustrative purposes only Source: Fidelity.com Screen-print taken on 12/22/2016
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Valuation Pricing: Fixed Income Analytics
For illustrative purposes only Source: Fidelity.com
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Historical Pricing: Trading Liquidity
For illustrative purposes only Source: Fidelity.com Screen-print taken on 08/21/2019
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~50K Unique Bonds Offered
~75KTotal Offerings
Live Pricing: Fidelity Bond Aggregation
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Live Pricing: Live Listing of Bonds Available
For illustrative purposes only Source: Fidelity.com
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Live Pricing: Treasuries and Corporate Live Bid and Offer Prices
For illustrative purposes only Source: Fidelity.com
Bid Price: 99.421Ask Price: 99.469Yield Spread: 0.005%
Bid Price: 105.904Ask Price: 105.999Yield Spread: 0.011%
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Live Pricing: Municipal Bond Offerings
For illustrative purposes only Source: Fidelity.com
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Live Pricing: Depth of Book
For illustrative purposes only Source: Fidelity.com
11 dealers offeringDifferent quantities and prices6 dealers bidding
Different quantities and prices
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Live Depth of Book and Historical Recent Trades for Corporate Bonds
For illustrative purposes only Source: Fidelity.com
Recent TradesInvestor Bought earlier at 112.52Investor Sold earlier at 112.20
Best Offer: 112.388Best Bid: 111.902Yield Spread: 0.108
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Live Depth of Book and Historical Recent Trades for Municipal Bonds
For illustrative purposes only Source: Fidelity.com
Best Offer: 124.083No Bids
Trades often months apartPricing increased over time, in line with general Muni market
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Live Pricing: Request for Bid Quote
For illustrative purposes only Source: Fidelity.com
Price discovery for securities without an “active” bid quote available on Fid.com
Allows multiple dealers to competitively bid on the position
Access Bid Wanted Dashboard
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Live Pricing: Bid Wanted Dashboard
For illustrative purposes only Source: Fidelity.com
Easily see the Best Bid: 98.012
Clearly identify the exact time a bid response will be returned
Ability to Place Order directly from Dashboard
View by Account
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Live Pricing: The Yield Curve
For illustrative purposes only Source: Fidelity.com
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Live Pricing: The Yield Table
For illustrative purposes only Source: Fidelity.com
Fidelity.com > Research > Fixed Income Bonds & CDs
Quick and easy scan of 120 comparative yield data-points
Derived every 15 minutes from live bond inventory
Immediate, one-click, access to search results for that category
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Live Pricing: Using the Fidelity.Com Bond Yield Table
For illustrative purposes only Source: Fidelity.com
Click on a yield to see offerings
View by Highest or Median yields
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Understanding Trading Costs
Impact
Transparency
Mark-up Fee Comparison
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Cost Transparency
AFidelity Process: “Transparent Pricing”
OFFERINGS SEEN BY TRADERS
PRICES SEEN BY CUSTOMERS IN
OFFERINGS
PRICES SEEN BY CUSTOMERS IN TRADE TICKET
BMarkup Broker Process: “Undisclosed Pricing”
Inventory (and prices) from dealers
Inventory (and prices) from dealers
Disclosed Mark-up
($1/Bond)
Inventory (and prices) from dealers
$1
Bond
1 2 3
Inventory (and prices) from dealers
Inventory (and prices) from dealers
Inventory (and prices) from dealers
Undisclosed Mark-up
($?/Bond)
Undisclosed Mark-up
($?/Bond)
$?
Bond
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Mark-up Fee Comparisons
For illustrative purposes only
Source: Fidelity.com
Fidelity’s $1 per bond Mark-up(104.109 – 104.009)
Another broker’s $21.07 per bond Mark-up(107.5036 – 105.3966)
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Confirms now display Mark-up/down
For illustrative purposes only
Source: Fidelity.com
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Compare Fidelity’s $1 per bond mark-up with competitors
For illustrative purposes only Source: Fidelity.com, January 2019 See disclosure on page 37 for details on this study
Minimum markup or markdown of $19.95 applies if traded with a Fidelity representative. For U.S. Treasury purchases traded with a Fidelity representative, a flat charge of $19.95 per trade applies. A $250 maximum applies to all trades, reduced to a $50 maximum for bonds maturing in one year or less. Rates are for U.S. dollar-denominated bonds; additional fees and minimums apply for non-dollar bond trades. Other conditions may apply; see Fidelity.com/commissions for details. Please note that markups and markdowns may affect the total cost of the transaction and the total, or "effective,"yield of your investment. The offering broker, which may be our affiliate, National Financial Services LLC, may separately mark up or mark down the price of the security and may realize a trading profit or loss on the transaction.
Markup - For secondary market bonds and CD purchases, the difference (dollar and %) between the Prevailing Market Price (PMP) and the trade price. Mark-up is calculated as: Mark-up / Total initial price x 100. The mark-up includes, but may not be limited to, Fidelity’s $1 per bond pricing. Details available on our fee schedule.
Fidelity.com/fixed-income-bonds/bond-pricing
Online:Fidelity Viewpoint: How much am I paying for my bonds?
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In Review
Assessing Pricing for Individual Bonds
Comprehending the Bond Market
Understanding Trading Costs
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Where to start: Fidelity.com > Research > Fixed Income, Bonds & CDs
fixedincome.fidelity.com/ftgw/fi/filanding
For illustrative purposes only
Source: Fidelity.com
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How Fidelity Can Help
Further understand your current bond holdings
Explore how you may improve your portfolio with bonds
See if you’re currently paying additional mark-ups on bond transactions
Meet with a Fidelity investment professional
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1. (from pages 33) Fidelity commissioned Corporate Insight to study bond pricing, available online, for self-directed retail investors from five brokers that offer corporate and municipal bonds for comparison to Fidelity's standard online pricing. The study compared online bond prices for more than 40,000 municipal and corporate inventory matches from February 8 through February 14, 2018. It compared municipal and corporate inventories offered online in varying quantities. The study found that, on average, the three financial services firms identified in the chart were asking $14.55 more per bond. Corporate Insight determined the average price differential by calculating the difference between the prices of matching corporate and municipal bond inventory at Fidelity, including Fidelity's $1 per bond mark-up for online trades vs. the prices offered online for the same bonds from the three competitors in the table, then averaging the differences of the financial services firms. An order size of 22 bonds was selected to illustrate the hypothetical trade because this is the average for Fidelity's retail brokerage account holders who purchased individual municipal or corporate bonds for the 12 months ending February 2018.
Minimum markup or markdown of $19.95 applies if traded with a Fidelity representative. For U.S. Treasury purchases traded with a Fidelity representative, a flat charge of $19.95 per trade applies. A $250 maximum applies to all trades, reduced to a $50 maximum for bonds maturing in one year or less. Rates are for U.S. dollar-denominated bonds; additional fees and minimums apply for non-dollar bond trades. Other conditions may apply; see Fidelity.com/commissions for details. Please note that markups and markdowns may affect the total cost of the transaction and the total, or "effective," yield of your investment. The offering broker, which may be our affiliate, National Financial Services LLC, may separately mark up or mark down the price of the security and may realize a trading profit or loss on the transaction.
References to individual securities are for illustrative purposes only, and should not be construed as investment advice.
In general, the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities). Fixed income securities also carry inflation risk, liquidity risk, call risk and credit and default risks for both issuers and counterparties. Any fixed income security sold or redeemed prior to maturity may be subject to loss.
Disclosures
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Interest income earned from tax-exempt municipal securities generally is exempt from federal income tax, and may also be exempt from state and local income taxes if the investor is a resident in the state of issuance. A portion of the income received may be subject to federal and state income taxes, including the federal alternative minimum tax. In addition, investors may be subject to tax on amounts recognized in connection with the sale of municipal bonds, including capital gains and “market discount” taxed at ordinary income rates. “Market discount” arises when a bond is purchased on the secondary market for a price that is less than its stated redemption price by more than a statutory amount. Before making any investment, investors should review the official statement for the relevant offering for additional tax and other considerations.
The tax information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice. Fidelity does not provide legal or tax advice. Fidelity cannot guarantee that such information is accurate, complete, or timely. Laws of a particular state or laws that may be applicable to a particular situation may have an impact on the applicability, accuracy, or completeness of such information. Always consult an attorney or tax professional regarding your specific legal or tax situation.
Past performance is no guarantee of future results.
Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917
765139.7.0 1.9872603.111
Disclosures